- The Washington Times - Friday, February 22, 2008

Politicians have been talking for months about the Federal Housing Administration stepping up to guarantee loans and mortgage programs for folks whose credit history doesn’t qualify them for conventional financing.

I want to share with you a mortgage refinancing my company recently settled using FHA mortgage financing.

The borrowers own a property in South Carolina worth about $160,000. They have an 8 percent variable-rate mortgage in the amount of $110,000. An automobile accident last year caused the husband to miss a lot of work.

Credit card balances got jacked up to the tune of $30,000, and payments were not made in a timely manner. The couple’s credit score plummeted to 580, far below what would be acceptable under conventional financing.

Now that they are both back at work, they called and inquired about refinancing. I see that their $30,000 credit card debt carries interest rates varying from 16 percent to 21 percent and the monthly obligation is nearly $1,100.

I run some numbers and suggest that they pay off their mortgage and take out $30,000 to get rid of the credit cards. Their monthly cash flow drops by almost $1,000, and the entire debt would be locked into a fixed, tax deductible rate of 6 percent.

I have one worry: Can I get their application approved under an FHA program? I submit the application to FHA’s Total Scorecard automated underwriting system, offered through the Federal Home Loan Mortgage Corp. (Freddie Mac) and Fannie Mae, the two giant companies that buy and package mortgage loans from lenders.

To my pleasant surprise, my borrowers receive approval. Unlike the former subprime alternative, these folks got a fixed rate of 6 percent with no points or origination fees. A subprime loan would have been far more expensive.

Is there a downside? Yes, but not much. FHA requires that the borrower pay a 1.50 percent Mortgage Insurance Premium. It can be rolled into the loan amount, but it’s a hefty fee nonetheless.

Additionally, FHA requires that a monthly fee equal to 0.5 percent annually be paid as part of the monthly payment. In my borrowers’ case, it resulted in $58 more a month.

Still, this refinancing plan for my borrowers is an excellent alternative to any subprime program and certainly is better than retaining the high-interest credit card debt.

Many homeowners in high-cost areas are shut out from FHA financing because the FHA loan limits are too low. Not for long. President Bush recently signed the economic stimulus bill, which calls for raising the FHA loan limits in high-cost areas.

Stay tuned. An FHA loan may be a good alternative for folks with impaired credit.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@pmcmortgage.com).

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